Venezuela Combats Price Speculation, Invests in Production After Currency Devaluation
Mérida, January 18th 2010 (Venezuelanalysis.com) – As part of its plan to stimulate non-oil exports, substitute imports, and control inflation following the recent currency devaluation, the Venezuelan government emitted $100 million in bonds, announced the details of a its plan to boost domestic production, and stepped up legal measures against price speculators.
A week ago, the president announced a plan to devalue the currency, which had been pegged at 2.15 bolivars to the dollar since 2003. The adjustment established a dual rate on government-issued oil dollars – 4.3 bolivars for non-essential imports and 2.6 bolivars for food, medicines, and inputs necessary for agriculture and manufacturing.
The largest national worker union confederation, UNETE, backed the government’s measures, while urging for wage increases and strict penalties for price speculators in order to counter a potential spike in inflation.
To address this issue, the government announced a 25% minimum wage increase this year. It also vowed to decrease the value of the dollar on the parallel market, which inflated in recent years as a result of speculation by traders and the government’s tight control on the dollar supply. This put upward pressure on general inflation, as many businesses adjusted their prices to the parallel dollar value.
Last week, the BCV emitted $100 million in short term bonds at the rate of 4.3 bolivars to the dollar, in an effort to soak up bolivars and increase the supply of dollars. The price of the parallel dollar simultaneously decreased from 6.4 bolivars to 5.8 bolivars.
There is still speculation as to whether – and to what extent – the prices of many imported products will rise, and what effect this may have on overall inflation. Private federations of agricultural producers are lobbying the government to increase the controlled prices on essential food items such as milk, cheese, and oil, and Venezuelan news reports indicate there is talk of the automobile sector increasing prices.
Venezuela’s inflation became Latin America’s highest as the economy grew for twenty consecutive quarters starting in 2003. In 2009, the economy contracted 2.9 percent, and cumulative inflation decreased by nearly six percent compared to the previous year.
State Investment in Production
To stimulate domestic production and reduce dependence on raw material exports, the government presented the details of its plan to invest an initial 2.6 billion bolivars in the productive sector, and to increase the overall supply of dollars to Venezuelan producers.
“We are going to create preferential conditions for those business sectors that are willing to advance in the construction of the socialist productive model, even as we support all sectors, because the measure is to immediately stimulate those who have the capacity to produce,” said Agriculture and Land Minister Elias Jaua in a public event over the weekend.
This “socialist” orientation means prioritizing food production and manufacturing, especially small and medium sized businesses, to satisfy domestic needs and to export to Venezuela’s strategic partners in its project to construct a “pluri-polar world” and resist being dependent on its top oil buyer, the U.S. These partners include countries from every region of the Global South, the member countries of the Latin American trade blocs ALBA and MERCOSUR, as well as Russia, Japan, Portugal, Belarus, China, and Iran.
Jaua said the government is currently receiving proposals from potential producers of cacao, coffee, rice, fruit, beans, and processed foods; plastic, aluminum, steel, and leather products; textiles and shoes; packaging, chemicals, medicines and vaccines, inputs to manufacturing and agriculture, electric appliances, wood, and machinery for construction.
Out of a total of 6,394 products reviewed so far by the government’s international currency administration (CADIVI), 59% of the products are classified as non-essential and subject to the rate of 4.3 bolivars to the dollar, while the other 41% are classified as essential and subject to the rate of 2.6 bolivars to the dollar.
Official figures indicate the state is in good financial shape to afford its planned investments. It has $35 billion in international currency reserves, and it finished 2009 with 30 billion bolivar surplus, approximately 15% of total state spending.
“The adjustment in the exchange rate is going to permit the government to have at its disposal a quantity of resources, not to cover a deficit nor to fatten the state bureaucracy, but to continue the policy of stimulating the national productive sector,” said Jaua.
Also, the nationalization of eight small private banks in November and December last year increased the state’s share of the financial sector to nearly 25%. The state merged a group of nationalized banks into a new public investment bank named Bicentenary Bank, which will administer the investments.
Combatting Speculation
“The Central Bank of Venezuela is going to strongly intervene. Speculators, you are going to repent,” said President Chavez last week as he announced the government’s plans to combat price speculation. “I propose expropriation for these businesses and I do not want us to lose a single day to effectively carry out these speculations, and pass [the businesses] to the workers,” said Chavez.
Over the past week since the currency devaluation was announced, inspectors from the consumer defense institute INDEPABIS as well as the National Guard have visited 1967 businesses and taken measures against 1031 of them for price speculation, including fines and temporary closures, according to INDEPABIS Director of Inspections and Auditing Valentina Querales.
In two relatively high profile anti-speculation cases, the government nationalized four large supermarkets from the multinational chain Exito, and ordered INDEPABIS to open an investigation of the shopping mall giant SAMBIL in Caracas. Trade Minister Eduardo Saman said price speculation was also discovered in other supermarket chains, particularly on the price of meat.
In public announcements on Monday, Chavez said supermarkets that are nationalized for price speculation may be incorporated into a new, state-run network of “socialist markets” which sell essential products at subsidized prices to put downward pressure on inflation.
In recent weeks, such socialist markets have already sold thousands of “arepas,” Venezuela’s typical food made from corn flour and filled with meat and cheese, at about a quarter of the market price on the streets of Caracas.
Meanwhile, community organizations, local squadrons of the United Socialist Party of Venezuela, and the “Socialist Women’s Front” have joined in the fight against price speculation by monitoring local businesses and reporting speculators to the government through a national hotline.
Venezuela’s women’s minister, Maria Leon, encouraged the citizens’ groups. “We should organize ourselves into assemblies of 30 people, women and men. It is very important to know the law and our rights, and that we all denounce [speculators] to INDEPABIS through the telephone number that President Chavez gave us,” said Leon.
Some labor unions also called on workers to take an active role in the anti-speculation vigilance by occupying and inspecting businesses independently. Several National Assembly legislators expressed their willingness to reform current laws to facilitate the expropriation of businesses caught speculating on prices.